As the US approaches the E10 “blend wall,” can higher ethanol blends open a market?

Is there evidence of consumer demand for higher ethanol blends, and on what terms? The Digest looks at new data from Iowa.

The Iowa Renewable Fuels Association reports that E-85 sales rose to a record 2.65 million gallons in Q1 2011, up 27 percent over 2010, after E-85 set an Iowa sales record of 9,311,908 gallons in 2010, a 43% increase over 2009. The Iowa RFA noted that the sales record was achieved despite a 50 percent cut in the Iowa E85 tax credit in January 2011, to 10 cents per gallon.

Is there renewed vitality in E-85? Let’s take a look.

E85 per outlet

The Iowa RFA reports that there were 138 outlets for E85 in 2010, while the Iowa Department of Revenue says that there were 165 outlets, while the IDOR estimated E85 sales at 10 million gallons. Using the government figures as a base, Iowa is pumping 166 gallons of E85 per day, per E85 outlet – out of an average of 1294 gallons per day of fuel at the average Iowa fueling station. That’s about 13 percent market share for E85, and 20 percent for ethanol as a whole, well behind the 52 percent market share ethanol sales have in Brazil.

Iowa E85 vs Gasoline, on the BTUs

According to E85prices.com, Iowa E85 fuel is priced just about on the money, compared to gasoline. Overall, E85 gasoline sells for an average of $2.97 per gallon, or 76 percent of the price of E10 gasoline, while containing 74 percent of the BTU value.

In total, 42 percent of stations where E85 is sold are reporting E85 prices which are discounted 25 percent off gasoline, making E85 a better buy on the BTUs.

The national E85 situation

Nationally, E85 is selling at a 16.4 percent spread, according to e85prices.com – $3.16 for E85, vs $3.78 for E10 gasoline, with E10 offering a much stronger value proposition.

Accordingly, national E85 sales are estimated by the Energy Information Administration to hover around 62 million gallons at 1950 outlets, or 88 gallons per E85 outlet per day. That per-pump, per day figure i just 3 percent market share compared to the 3053 gallons per day sold at 121,446 US fueling stations.

As of May, only one other state, Louisiana, is selling E85 at a 20 percent of higher discount to gasoline, with most states offering a 10-17 percent discount, making E10 a better buy on the BTUs.

The flex-fuel car numbers

We looked at flex-fuel car availability in Iowa to understand the impact that availability would have on E85 sales. The state of Iowa reports that there are 1.49 million registered vehicles in the state, and 138,802 are flex-fuel enabled – a requirement to pump E85 ethanol. That’s 9 percent market share.

Overall, achieving 13 percent market share in Iowa, in E85 ethanol sales compared to E10, requires us to carefully consider the viability of E85, when only 9 percent of cars can utilize E85.

It is possible that E85 sales are higher (on a market share basis) than flex-fuel car market share because E85 enthusiasts are driving out of their way to pump E85, resulting in higher per-pump numbers than would be achieved in a state-wide rollout.

On the other hand, Iowa is achieving 37 percent higher E85 sales, on a per-pump basis, than the market share that would be expected by simply selling 9 percent of its fuel in the form of E85 to the 9 percent of cars that have flex-fuel engines.

The Iowa flex-fuel car owner

The 138,802 flex fuel car owners purchased, on average, 72 gallons of E85 per year, per vehicle, or about 8 percent of the average annual per-vehicle fuel consumption in the state. By comparison, E85 is available at 6 percent of Iowa stations.

Is E85 dead or alive?

National data shows very sluggish demand for E85 – just 4 one-hundredths of one percent of total US fuel sales, and only 3 percent of sales at those fueling stations that do offer E85.

Market access is a factor – more pumps will drive more sales. But simply offering E85 at every gas station in the United States would only drive sales to 3.9 billion gallons of E85, based on current per-outlet demand.

Combined with a blend wall of around 13 billion gallons of ethanol blended at E10, that’s a limit of around 17 billion gallons of ethanol – leaving more than 19 billion gallons of drop-in fuels to be sold per year by 2022 if RFS targets are to be reached. That’s a nearly-impossible task, in terms of constructing capacity, given the first-of-kind financing hurdles drop-in fuels face in the 2011-2016 period.

Reviving E85

The data suggests that flex-fuel car availability, and E85 price, are driving far more sales than any other factor. Were the entire US fleet flex-fuel enabled at this time, and the E85 spread across the nation equal to the Iowa spread, there would be 18 billion gallons of E85 demand in place today. That would have created a 26 billion gallon ethanol demand today, given the residual demand for E10.

Moving forward

Here at the Digest, we certainly can see that it is cheaper to transport ethanol within Iowa, than export it, say, to California. Some of the differential between E85 prices in Iowa and California ($2.97 and $3.59 per gallon, respectively), represents transportation charges.

But it doesn’t cost 62 cents per gallon to move fuel 2,000 miles, and Illinois is offering E85 at an average price of $3.57 (with a 14 percent spread between E85 and E10), despite the fact that the state is a major ethanol producer.

In addition to looking at market access, in the form of blender pump and ethanol pipeline investments – the ethanol industry may well need to look carefully at its strategy to distribute E85 ethanol at a 25 percent discount to gasoline on a wider basis, and work carefully with automakers on rapidly increasing the number of flex-fuel cars. That’s a formula that works well in Brazil.

Increasing distribution of ethanol, priced at its current discount of 15 percent to gasoline, does not look like a winner in creating the conditions for meeting the RFS in the US. Without a path to distributing 36 billion gallons by 2022, the EPA will have little choice other than to “mess with the RFS.”